Report 2000-129 Summary - May 2001

Department of Housing and Community Development: Poor Administration of Certain Aspects of the California Natural Disaster Assistance Program for Loma Prieta Earthquake Victims Could Result in Inappropriate Loan Forgiveness

HIGHLIGHTS

The Department of Housing and Community Development (department) administers the California Natural Disaster Assistance Program (CALDAP). We reviewed CALDAP loans provided to victims of the Loma Prieta earthquake and found that:

RESULTS IN BRIEF

The Department of Housing and Community Development (department) has not exercised effective oversight of the California Natural Disaster Assistance Program's (CALDAP) assistance to victims of the Loma Prieta earthquake. After the earthquake in October 1989, the department loaned approximately $87 million to more than 900 borrowers to repair and rehabilitate damaged or destroyed single-family dwellings and rental housing. Some homeowners, primarily in the cities of Berkeley and Oakland, have expressed concern about poor workmanship by contractors and unreasonable loan terms. These complaints might have been reduced if the department had taken advantage of opportunities to improve its communications with borrowers. Furthermore, over the past 10 years, the department has not sufficiently monitored borrowers in its CALDAP-R program, which provided loans to owners of rental housing. In addition, as a condition of receiving a state loan and having part or all of the loan forgiven, the property owners agreed to rent units to low-income tenants at below-market rents. The department has continued to certify that nearly all of these borrowers are adhering to the terms of their loans, despite the fact that some have overcharged tenants and others have left units vacant. As a result, some borrowers who have not provided housing as required may have their loans forgiven.

The CALDAP-O program provided loans to homeowners in need of assistance. Nearly 45 percent of CALDAP-O borrowers in Berkeley and Oakland have alleged various problems. Some of the complaints date to the early 1990s when the repair work was completed, and relate mostly to poor workmanship by contractors and unreasonable loan terms. We found that the validity of these complaints varied. For instance, some borrowers have stated that the work performed on their homes was unsatisfactory or incomplete, and some said that rehabilitation inspectors did not appropriately perform their jobs. In fact, a few homeowners have succeeded in recovering damages from contractors through legal action. However, based on the available documentation, we found that for the most part, the local agencies administering CALDAP had adequately overseen repairs and inspections.

A number of borrowers have also alleged that they were not allowed to choose the contractors who worked on their homes. We found that the contractor selection processes varied among the local jurisdictions we contacted. Some jurisdictions involved potential borrowers in the contractor selection process more effectively than others. The seemingly restrictive selection process used by some jurisdictions may have resulted in a few borrowers believing that they had to use a specific contractor or were not allowed to select their own. However, we did not find any documentation in loan files to support borrowers' allegations that they were directed to select particular contractors.

The department may have also contributed to some borrowers' confusion regarding their CALDAP homeowner loans by not sending periodic loan statements. Except for a statement of final indebtedness following the payment of all anticipated CALDAP rehabilitation expenses, the department has not provided borrowers with periodic statements of their increasing total indebtedness as interest accrues on their loans. Consequently, some borrowers believed their loans were actually grants while others did not fully understand the loan repayment terms or refinancing restrictions. Although several borrowers alleged they could not get other property loans because of their CALDAP loans, the department will in fact consent to mortgage refinancing as long as the new loans meet certain requirements.

As stated above, the CALDAP-R program assists owners and tenants of rental properties. For this reason, CALDAP-R borrowers are required to comply with certain rent restrictions, and if these borrowers also restrict units to low-income tenants for at least 10 years of their loans, the State will forgive the rehabilitation portion of their loans. Yet the department did not establish a process to monitor Loma Prieta CALDAP-R borrowers until mid-1996, 4 years after most of the rehabilitation work had been completed. This delay was despite the statutory requirement that borrowers requesting loan forgiveness comply annually with specific performance conditions for rent and tenant-income levels. Thus, low-income tenants in those facilities for which the owners had opted for forgiveness had no assurance that they were provided the low-cost housing mandated in the statutes.

Further, the department has not been sufficiently diligent since it began monitoring compliance with the terms of rehabilitation loans in 1996, thereby increasing the risk that some part of the $15.6 million in eligible loans may be forgiven even though some borrowers may not have complied with the required terms. The department has not maintained sufficient documents in its files to verify compliance, and supporting data from loan files has not always agreed with the summary records that the staff prepares and provides to the program's managers.

We also found that the department incorrectly applied maximum allowable rent rates. Moreover, the department has classified some borrowers as conditionally compliant despite the fact that they left units vacant for years at a time or charged rents in excess of the maximum allowable. However, in these cases, it is unclear whether the department will require the borrowers to repay a portion of their loans for the noncompliant years. By granting these borrowers greater latitude than statutory provisions allow, the department may ultimately forgive portions of loans that are not eligible for forgiveness.

RECOMMENDATIONS

To ensure that the CALDAP program that provided assistance to Loma Prieta victims effectively conforms to its underlying statutes and guidelines, the department should:

To ensure that future loan programs better achieve their goals, the department should reassess its guidelines and standards of operation for local jurisdictions in areas such as contractor selection and oversight of work quality.

The cities of Berkeley and Oakland should continue to provide a process to investigate and evaluate the complaints of CALDAP borrowers.

AGENCY COMMENTS

The department generally concurred with our recommendations. In particular, it indicated that it would send letters to each borrower within the next 45 days providing loan information and identifying specific points of contact in the department to answer borrower questions. Further, it will initiate an annual process of providing loan statements to CALDAP borrowers beginning in January 2002. It will also develop guidelines to ensure consistent review of decisions to forebear on the foreclosure or other enforcement of its loans. Finally, it will take corrective measures to ensure future rent overcharges do not occur and will review exceptions identified in the report to determine options for appropriate remedies. The cities of Berkeley and Oakland concurred with the report and pledged to continue investigating and evaluating complaints from CALDAP borrowers.